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Cost Accounting Problems for Skanda, Inc.

Problem 1

Skanda, Inc. sells clothing, shoes, and accessories at a suburban location in Boston. Here is information for the year ended June 30, 2009:

Clothing Shoes Accessories
Departmental Sales $850,000 $320,000 $230,000
Subtract: Departmental Costs
Variable Costs $510,000 $256,000 $ 126,500
Fixed Costs 290,000 70,000 42,000
Total Costs $800,000 $326,000 $168,500
Departmental Operating Income (Loss) $ 50,000 $ (6,000) $ 61,500
Management is considering closing the shoe operation because of its operating loss

Required:

Assume that the Fixed Costs listed under Departmental Costs include $105,000 of company-wide fixed costs that are not traceable to any of the individual departments. These common fixed costs have been allocated to the departments as follows: $63,750 was allocated to the Clothing department, $24,000 to the Shoes department, and $17,250 to the Accessories department. Based on these new assumptions:

a. Prepare a segmented income statement for Skanda, Inc.
b. Would closing the Shoes Department improve the company's net income? Explain.

Problem 2

Skanda operates a manufacturing process that generates two joint products, ThingOne and ThingTwo. The budget forecast for the upcoming period is as follows:

Product Quantity Produced Allocated Joint Cost Allocated Joint Cost
per Unit
ThingOne 5,000 gallons $100,000 $20
ThingTwo 1,000 gallons 20,000 20

The selling price for ThingTwo was $30 per gallon last period, but due to recent changes in the market, Waco forecasts that the selling price will be only $7.50 per gallon next period. Waco's managers have determined that Waco has the following three choices:

- Sell ThingTwo for $7.50 per gallon.
- Process ThingTwo into a different product, ThingThree. It costs an additional $2.00 per gallon to process ThingTwo into ThingThree, but ThingThree sells for $9.00 per gallon.
- Discard ThingTwo instead of selling it or processing it. There is no disposal cost.

Required:

What should Waco's management do? Explain your reasoning.

Problem 3

Skanda is planning to buy injection molding machinery costing $160,000. The machinery has an expected useful life of 5 years, and it will be depreciated using the straight-line method, assuming a $20,000 expected salvage value. Skanda requires a minimum rate of return of 8%, and they have made the following forecasts pertaining to the operation of this machinery:
Year Estimated Annual Operating Cash Inflows Estimated Annual Operating Cash Outflows Annual Depreciation
1 $ 40,000 $8,000 $28,000
2 $50,000 $18,000 $28,000
3 $75,000 $22,000 $28,000
4 $105,000 $35,000 $28,000
5 $110,000 $50,000 $28,000
Assume a tax rate of 34% on all taxable income.

Required:

1. Determine the Payback Period for this proposal.
2. Determine the NPV for this proposal, assuming an 8% required rate of return.
3. Determine the IRR for this proposal.
4. Do you recommend that Skanda proceed with this proposal? Why or why not?

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This solution provides a detailed a computation of the given accounting problem.

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